How to put fresh capital to work in 2015

Michael is a managing partner at FMD Capital
Management, a fee-only registered investment advisory firm specializing in
exchange-traded funds. Michael is the leader of the FMD investment committee
where he implements actively-managed income portfolios using ETFs, mutual funds
and closed-end funds. His investment philosophy is aimed towards designing
portfolios that are low in volatility while still providing a high income
stream, then shift in response to changing market environments. He also
implements active risk management practices to protect his investors from
ultimately experiencing a large loss. He regularly contributes his views on
wealth management in his
company blog, podcasts and special reports. You can follow Michael on
Twitter @fabiancapital or email
him at Michael@fmdcapital.com.

It's already been a bumpy ride so far in 2015 and with so many retirement savers and investors with fresh capital to put to work, making the right decisions now will have a profound impact on your total return come year-end.

A new year brings about fresh contributions, and at our firm we have just gone through another wave of rebalancing, as investors make their IRA contributions or toggle their funds with required minimum distributions to taxable accounts for reinvestment.

Depending on your personal investment plan, the easy answer is to gingerly spread that capital out among your existing holdings so that you don't become overweight any particular position or alter your asset allocation. However, we have found that this type of traditional approach in some cases racks up unneeded transaction costs, and in turn doesn't allow your portfolio to adapt to changing market environments. So instead, it can behoove you to examine the market for relative value, and select sectors or asset classes that present the best entry point and potential for high returns.

The difficult part is uncovering the areas that align with your goals and objectives, while also falling into your general comfort zone. With stocks on their highs, and interest rates on their lows, nothing looks that appealing at first glance. Yet peeling back the surface, it's easy to see that certain areas of both the equity and fixed-income market are good relative buys for intermediate and long-term investors.

This is in large part comes as a result of the massive dive in oil prices, as the high-yield bond market is made up of roughly 15%-20% oil-related issues. Right now could be an excellent low-duration area that offers attractive total return prospects if oil prices stabilize and the economy remains on track during 2015. The general rule of thumb that I recommend is seeking out areas where the duration is roughly half the distribution yield. That way the fund pays enough cash flow to overcome any impending interest rate fluctuations. A fund that more conservative retirement investors could consider is the PIMCO 0-5yr High Yield Corporate Bond ETFHYS, +0.04%

Observing the equity landscape, it's obvious that interest rate sensitive sectors such as utilities, consumer staples, and real-estate stocks are a touch over valued on a relative basis. Furthermore, they will likely exhibit higher volatility if interest rates begin to tick up sometime in the middle or latter parts of 2015.

Conversely, large energy-related stocks have massively underperformed given the price action in crude oil and are trading at attractive comparative valuation levels. Another sector that looks interesting is financial stocks, which could benefit from the interest rate environment in 2015. A few of my favorite index-based examples include the Financial Select Sector SPDR ETFXLF, -0.30%
and iShares Energy Producers ETFFILL, +0.23%

Complementing your existing core holdings by making strategic additions to your portfolio may not be for everyone. However, for more active investors, it could yield excellent benefits and significantly increase your chances of superior performance. The key to success will be in developing a plan to make additional allocation changes as market dynamics evolve, since time seemingly heals all wounds in various asset classes.

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